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The Atlanta Fed's macroblog provides commentary on economic topics including monetary policy, macroeconomic developments, financial issues and Southeast regional trends.

Authors for macroblog are Dave Altig and other Atlanta Fed economists.


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April 30, 2007


On 1st Quarter GDP, Hold That Thought

From SmartMoney.com, the basics of the March report on personal income and outlays:

The personal income of Americans rose strongly again in March but their spending didn't meet expectations, while a key gauge of core inflation grew at a slower rate.

Personal income increased at a seasonally adjusted rate of 0.7% a second straight month, the Commerce Department said Monday. Originally, February income was seen up 0.6%.

March personal consumption grew 0.3% compared to the month before. Spending increased a revised 0.7% in February. Originally, February spending was seen 0.6% higher...

Spending on durable goods, those designed to last three years or longer, was unchanged in March, after falling 0.4% the previous month. Non-durable goods spending rose 1.0%, after a 0.4% climb in February. Spending on services decreased 0.1%, following a 1.1% increase in February.

That figure on services consumption is a bit eyebrow-arching, but overall it's hard to get too excited about this report, coming as it does on the heels of last Friday's advance figures for 1st quarter GDP. In case you haven't heard, it was not great:  Macro Man said Blah, Claus Vistesen said "ouch", and it hurt Dave at VoluntaryXchange to give the economy a "D" (to name just a few who were underwhelmed at the 1.3 percent annualized pace revealed by the Bureau of Economic Analysis).  William Polley has a nice round-up of other blogger comments, but I am with him in thinking that King at SCSU Scholars called it about right:

When this number is revised (and there will be two such revisions) the trade figure is the one that changes the most. So I expect this GDP estimate to be rather volatile to trade revisions.

The record does indeed show that the trade figures are apt to change as the numbers are re-crunched:

   

Gdp_revisions

   

I wouldn't argue that the 1st quarter is likely to look anything other than weak when all is said and done, but I wouldn't carve that 1.3% in stone just yet.

April 30, 2007 | Permalink

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The construction report released today provided the first adjustment (an improvement in this case) to Q1.

Posted by: Steve | April 30, 2007 at 11:49 PM

Startling graph of revisions...just housing slowdown related or were trade revisions always that wild? Time to play with the death/birth modelling a kill something, no?
We saw a huge revision in Imports for q4, yes? Sank that lofty, dreamy 3.5 (remember those days and how damned productive we were?) to 2.0 and then that almost cheerful bounce to 2.5 on just more generous consumption IIRC.
Well, will get a dead cat bounce this time as some of us are sobering up...and getting downright thrifty. [thrifty: (archaic): a penny saved is so stupid].

Posted by: calmo | May 01, 2007 at 01:45 AM

This downturn reminds me of the 70,73,80 downturns interestly enough. Consumption lead downturns.

I wouldn't be surprised consumption is revised downword and residential investment as well.

Posted by: Sampler | May 01, 2007 at 02:41 PM

Sorry - poor writing on my part.

I wasn't hurt by having to give the economy a "D" for the first quarter. I had in mind a jibe at the chicken littles who have been saying that 2.5-3.05 growth hurts when it really doesn't.

The nice thing about having a (grading) rule rather than (grading) discretion is that I don't have a time inconsistency problem related to who is in power and who is likely to win the next election.

Posted by: Dave Tufte | May 01, 2007 at 04:00 PM

Technical note: In the gdp the trade and inventory data measures the change from the end of the quarter to the end of the next quarter. in contrast the remaining data in the gdp accounts are the average of the three months data. So it is just inherent in the nature of the data that trade and inventory data will be more volatile.

This different treatment of the data grows out of what gdp is.
gdp is a measure of output.
However, it does not directly measure output. Rather it measures consumption and adjust that for changes in trade and inventories to indirectly measure output.

Because of this the frequent comment that personal consumption accounts for two-thirds of gdp is not really true.

Posted by: spencer | May 02, 2007 at 10:29 AM

I think that the strong increase in the stock market averages is holding up consumer spending in the face of declining house prices. So we won't see a full blown recession until the stock market turns. This may seem a bit paradoxical as you would generally expect an impending recession to cause the stock market to turn.

However, the stock market can become disconnected from the economy if it is in a bubble – which I think it is. Margin debt on the NYSE is rapidly increasing is a parabolic increase similar to what was seen in 2000 and this is the key factor driving the stock market. In fact nominal margin debt is above the peak in 2000, while margin debt indexed by the CPI and GDP (neither is ideal, best would be the value of securities on the NYSE) is approaching the 2000 peak. The market seems heavily dependent on increasing margin debt e.g. the weakness in the stock market from late February -mid-March was associated with stabilising margin debt (i.e. no increase). This gives a foretaste of what might happen in the increase in margin debt were to stop.

This leads to the following chain of reasoning:
1) margin debt cannot increase in a parabolic fashion for very long;
2) spikes in margin debt have not been followed by plateaus in the data series going back to 1959 but rather declines;
3) The spikes in margin debt in 2000 and now dwarf all previous spikes;
4) 1) and 2) suggest that the stock market will turn fairly soon unless margin buyers are replaced by other buyers e.g. institutions. This seems unlikely as institutions are not likely to re-enter the market after a substantial gain driven by such a large increase in margin debt. 3) suggests that the turn could be substantial
4) When the stock market falls and it may fall precipitously, there is likely to be a strong reaction on the part of consumers who have been living fairly precariously for quite a while (first depending on home price appreciation for their savings; now switching back to dependence on the stock market). The result will be a rapid descent into a recession.

Posted by: Alex Grey | May 04, 2007 at 12:22 PM

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April 29, 2007


What Are You Going To Believe -- Theory Or Your Own Lying Eyes?

The blogger epicenter of the free-trade debate is rumbling at Harvard, with Greg Mankiw and Dani Rodrik engaged in a terrific -- and important -- conversation about winners, losers, and how (or whether) economic theory divides the two.  You can check-in on the state of the debate at Angry Bear, where pgl provides the appropriate links.  It is highly recommended reading, but I think it ought to come with a few warning labels.  For example, Professor Rodrik responds to Professor Mankiw with this claim:

... there is no theorem that guarantees that the partial-equilibrium losses to import-competing producers “are more than offset by gains to consumers from lower prices.”

In a related vein, pgl opens his post with:

As we were applauding Dani Rodrik, Greg Mankiw was defending the Dan Drezner lower prices from free trade benefits everyone fallacy.

Let's be perfectly clear:  There are no theorems in economics that guarantee anything about the real world.  Economic models are not descriptions of physical realities but formalizations of stories about how social interactions deliver particular outcomes.  Different, equally coherent, stories deliver different predictions about the world.  The claim that "free trade benefits everyone" is not a fallacy, but a particular outcome based on a particular model.  Different models deliver different answers, so theory alone does nothing beyond eliminating stories that are internally inconsistent.

Or, perhaps, unconvincing.  The missing ingredient in this most recent installment of the free-trade discussion is evidence in favor of one story or another, a task that is a good deal messier than writing down models.  What makes matters worse is that adjudicating the issue is not a mere matter of counting up winners and losers.  In the court of determining what is "good" or "bad", economists have standing to address one question, and one question only:  Can someone be made better off without making anyone worse off?  That too depends on the model at hand, and in fact it's even worse than that.  The Rodrik-Mankiw debate revolves in part around a result known as the Stolper-Samuelson theorem. Greg Mankiw does a good job explaining Stolper-Samuleson and its relevance to the subject at hand, but I'll note one item from the Wikipedia description of the theorem

If considering the change in real returns under increased international trade a robust finding of the theorem is that returns to the scarce factor will go down, ceteris paribus. A further robust corollary of the theorem is that a compensation to the scarce-factor exists which will overcome this effect and make increased trade Pareto optimal.

In simple terms, there are losers, but the winners can win enough to more than match those losses.  All would be well with the world if the winners and losers could be easily identified, and an appropriate compensation scheme implemented.  But what if that is not feasible?  What is the right move then?  To protect the losers at the expense of significant opportunity cost to potential winners?  The other way around?  I've yet to encounter an economist trained to answer those questions, and you should be very suspicious of any who speak as if they are.

April 29, 2007 in This, That, and the Other, Trade | Permalink

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As always, I'll have to complain about the use of the appellation "free trade" in reference to a trading system in which China actively pegs the yuan against the dollar at one-fifth its purchasing-power-parity value, and Japan actively manipulates the yen by a zero-interest-rate policy (no longer using obvious direct intervention as in 2003-2004, when it openly bought $320 billion and budgeted for $1 trillion of additional intervention).

This exchange-rate manipulation creates trade barriers just as real as tariffs of the same magnitude. If absent the manipulation the yen-dollar exchange rate would be around the 80 yen/dollar level of the mid-90s, when Japan-US trade was starting to come back into balance, then the current manipulated rate is equivalent to a 50% tariff in Japan on imports from the US.

Posted by: jm | April 29, 2007 at 02:49 PM

You make the same point Greg did in his comment to my post. The efficiency gains are such that IF the winners decide to compensate the losers, there is still a net gain. No one denies this. What Dani was saying - and I think he's right - is that SINE compensation, there will be losers. You don't deny this - and now Greg is claiming he does not either. So what's the debate here?

Posted by: pgl | April 29, 2007 at 03:47 PM

Dave,

That's a good post, taken as a whole.

I go a step further, though. Once trade policy is implemented, the issue is then based on real world outcomes, not theorems. And it's about at that point that many economists appear to get lost if not intentionally disappear if all isn't going well or according to preconceived notions.

Long before Alan Greenspan stepped to the microphone and explained that U.S. offshore production shifted to China-based operations could be impacted with U.S. trade policy but that such offshore production would not return to the U.S. but rather would flow elsewhere to another cheap global production source...well, long before that I had written, forwarded, and blog post my brief Economic Hydrology Theory (EHT) statement and principles. That statement summarized the offshore production growth situation in clear and precise language.

Economic reality and related outcomes are based on real world results, not classroom dogma whether pitched to kids or adults. Theorems only go so far. Economists who can't venture beyond the academic bounds of such devices and evaluate the real world results, recommending appropriate adjustments in the metrics are not economists that I recommend that any corporate clients hire.

Unlike many, you are an exception. Well reasoned thinking is what I am seeking. And you have it.

>

Posted by: Movie Guy | April 29, 2007 at 08:00 PM

Go tell "pareto optimal" to dead Iraqis why don't we. (if we ever find the documentation we are stealing oil from Iraq)

economist can be dangerously obtuse creatures.

Posted by: andy | April 30, 2007 at 06:23 AM

Had to run an get my glasses after that wallopin, eye-bulgin title Dave...I take it all back --Finnegan's Wake by what'shisIrishface is so Irishly over-rated.

jm, has most of my view of that matter without giving any space to the transnationals who are always neglected in this play ...especially with Paulson's vaulted connections. Same sorta vaulting with energy pricing and this administration...the sacking of Rome by a very few --not the hordes of barbarians as previously thought. [The barbarian critique of History]
Dave writes:
"All would be well with the world if the winners and losers could be easily identified, and an appropriate compensation scheme implemented. But what if that is not feasible?"

And it is hard to believe that the winners cannot be easily identified: those HF managers, those CEOs, those large shareholders.
The appropriate compensation scheme OTOH should be left to the hordes of barbarians because QED the present scheme is FUBAR...such is the inappropriate view of the losers whose eyes as andy points out may be no longer seeing much of anything.

Posted by: calmo | April 30, 2007 at 02:03 PM

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April 27, 2007


Wolfowitz's Defenders -- Bono Next?

Let me state at the outset that I have nothing to say about the brouhaha over Paul Wolfowitz's alleged improprieties at the helm of the World Bank -- or lack thereof -- or about his competence as manager of this, that, or any other thing.  But I think this, from the opinion page of today's Wall Street Journal, is important:

At a press conference during this month's World Bank-IMF meetings in Washington, four of the more progressive African finance ministers were asked about the Wolfowitz flap. Here's how Antoinette Sayeh, Liberia's finance minister, responded:

"I would say that Wolfowitz's performance over the last several years and his leadership on African issues should certainly feature prominently in the discussions. . . . In the Liberian case and the case of many forgotten post-conflict fragile countries, he has been a visionary. He has been absolutely supportive, responsive, there for us. . . . We think that he has done a lot to bring Africa in general . . . into the limelight and has certainly championed our cause over the last two years of his leadership, and we look forward to it continuing."

In the same pages not long ago, William Easterly had this to say:

African governments are not the only ones that are bad, but they have ranked low for decades on most international comparisons of corruption, state failure, red tape, lawlessness and dictatorship. Nor is recognizing such bad government "racist" -- this would be an insult to the many Africans who risk their lives to protest their own bad governments. Instead, corrupt and mismanaged governments on the continent reflect the unhappy way in which colonizers artificially created most nations, often combining antagonistic ethnicities. Anyway, the results of statist economics by bad states was a near-zero rise in GDP per capita for Ghana, and the same for the average African nation, over the last 50 years.

Let's be clear -- Easterly is no fan of Paul Wolfowitz.  But at least part of his criticism is based on the belief that reforms at the World Bank are not going far enough...

But beyond Uzbekistan and a few other laudable aid cutoffs, the Wolfowitz program was compromised by selective prosecution. By the bank's own measures, 54 other countries are about as corrupt as Uzbekistan, or worse. Should the bank cut off all 54? (I say, why not?) Wolfowitz was not willing to go that far, alas, which left everyone confused about what his criteria really were.

... and that the mission is not sufficiently single-minded:

Wolfowitz also continued a disastrous trend begun by [his predecessor, James D.] Wolfensohn, whose answer to every bank failure to meet a goal was to add three new goals. The pair have supplemented the bank's original objective -- promoting economic growth -- with everything from securing children's rights to promoting world peace. In so doing, they've sacrificed clarity of direction for ludicrously infeasible but PR-friendly slogans like "empowering the poor" and "attaining the Millennium Development Goals" (which cover every last ounce of human suffering).

Fair enough.  But whatever the outcome of this most recent bureaucratic flare-up, it would be good to keep our eyes on the prize.  Again from today's WSJ editorial:

... At the same April 14 press conference, Zambian Finance Minister N'Gandu Peter Magande endorsed the anticorruption agenda:

"We should keep positive that whatever happens to the president, if, for example, he was to leave, I think whoever comes, we insist that he continues where we have been left, in particular on this issue of anticorruption. That is a cancer that has seen quite a lot of our countries lose development and has seen the poverty continuing in our countries. And therefore . . . we want to live up to what [Wolfowitz] made us believe" that "it is important for ourselves to keep to those high standards."

Yes, indeed.

Addendum: In my opinion, the development debate is represented by the ongoing conversation between Professor Easterly and Jeffrey Sachs.  Courtesy of the former, you can follow that debate here

April 27, 2007 in Economic Growth and Development | Permalink

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Well, it is important to hear from Zambian Finance Minister N'Gandu Peter Magande endorsed the anticorruption agenda and not just the corrupted officials of the WB, who have maligned our WB president, Mr Wolfowitz.
We B big and open hearted in listening to any officials corrupted or not...such is the big and open nature of our cavernous skulls.
If Wolfie is so smart (really fellow big skulls) why does he accept/advance/insist on this pay increase, this promotion, for his dearly beloved?
It is not that banking experience (zero) that he brings to the WB, but his other considerable talents that attracted the attentions of the Bush administration, yes?

Open, honest and fair.
Hard-working performance that only wants fair compensation for work performed.

Posted by: calmo | April 29, 2007 at 01:09 PM

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April 26, 2007


A Credit Crunch It's Not

It does appear that Wall Street is pretty happy with the way the world looks this week. U.S. macroeconomic data is only part of that picture, of course, but to the extent that it is I think Dean Baker makes good sense:

The Commerce Department's data did show better than expected durable good orders in March, but this was following very weak reports in January and February. Year over year, durable good orders are still down by more than 3 percent in nominal terms... Against a backdrop of serious weakness, a better than expected month is always good news, but it seems a bit excessive to make too much of this very erratic data.

The other cause for celebration was a 22,000 increase in the rate of new home sales in March, measured against a downwardly revised February level. The basis for the celebration here escapes me. The consensus forecast was for a considerably larger bounceback from the weak February level. Even with the uptick, March sales were the slowest since the recession, excluding February. And the small uptick was almost certainly driven by weather...

But I'm finding some comfort in a Wall Street Journal article (hat tip to Calculated Risk) titled "Home Equity Stalls" (page D1 of the print edition):

After years of piling debt on their homes, Americans are becoming more cautious about using them as a piggy bank.

A cooling housing market and higher interest rates have made homeowners more reluctant to tap the equity they may have built up in their residences...

Now, the slowdown in home-equity borrowing is leading to weaker sales in some markets for autos, building materials and electronics, says Mark Zandi, chief economist of Economy.com.

Barry Ritholtz sounds off on that last theme, and Calculated Risk is beginning to worry about a consumer-led recession.  So why would I feel encouraged?  The WSJ article continues:

Lenders are responding to slowing demand for home-equity borrowing by boosting their marketing, unveiling special offers and focusing on traditional uses of home equity, such as home improvement and debt consolidation. Wells Fargo this week rolled out a "Home Improvement Program" that gives home-equity customers discounts at retailers such as Best Buy, Brookstone and LampsPlus.com and access to a network of third-party local contractors.

J.P. Morgan Chase & Co. is running its first cable-television advertising campaign for home-equity borrowing, focusing on the product's flexibility. It's also rolling out a training program designed to help bankers in Chase branches do a better job of selling home-equity products. Bank of America, has launched a "green" home-equity card program, in which the bank will make a $100 donation to environmental group Conservation International on behalf of new home-equity customers who use their equity-line Visa card for purchases of $2,500 or more.

In my view, the biggest threat from housing-sector woes has all along been the possibility of spillovers into credit markets -- the kind that can restrain economic activity even after consumers and businesses shake off some of the caution that the stress of uncertainty inevitably brings.  Several posts back I offered the opinion that a lack of available credit does not seem to be the driving factor behind weak growth in business investment.  Today's story suggests that the same may be true of consumers.  And that may just be the difference between a soft patch and downright ugliness.   

April 26, 2007 in Data Releases, Housing, Saving, Capital, and Investment | Permalink

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It may depend on what one means by a “credit crunch.” Banks are still in the business of making loans, and I didn’t imagine they would stop wanting to make loans to borrowers they consider creditworthy. But certainly for the lending industry overall, and probably for banks specifically as well, credit standards have clearly tightened. Just how much they have tightened remains to be seen. At the same time, demand for loans has declined. If banks are trying to push a comparable volume of loans into a significantly smaller market, they have to sell more aggressively. I would say, the absence of a clear intensification of marketing efforts in the prime credit sector would be a very bad sign. It is surely still open to question whether any observed intensification is sufficiently strong to compensate for the tightening of standards.

Posted by: knzn | April 27, 2007 at 09:11 AM

More aggressive marketing looks like a response to softening demand, and demand will soften most in segments that are still creditworthy by today's perverted standards but subjectively up to the eyeballs or inhibited by the chilling effect of aggressive collection and insolvency all around. But sincere congrats to the Fed for their optimism in defense of price stability. It's well past time.

Posted by: stringpusher | April 27, 2007 at 09:28 AM

Often advertising serves as a very good leading indicator.

Why is Sears widely advertising deep sales on white goods?

If you watch CNBC you would be amazed at the number of ads they are running for unconventional mortgages. What is this a sign of?

Posted by: spencer | April 27, 2007 at 10:02 AM

I believe the increases we've seen in CA home prices since '97 is typical of the Bubble states, & that our Bubble states have accounted for more than 40% of national r.e. sales over (at least) the last 4 years. With CA contributing about 12% of our GDP how can its residential r.e. prices revert to its long-term growth rate WITHOUT drawing the country into a recession?
This is worth the read:
April 25, 2007 "O.C. vs. U.S. home price gap approaches $500,000", Jon Lansner, OCRegister Blog link: http://blogs.ocregister.com/lansner/
"My quasi-annual check-in with an odd barometer tells me that Orange County housing is still pretty expensive. By comparing Realtors' median selling price data for Orange County and the nation, I found that in March our $706,650 median house was 3.26 times the nation's $217,000 typical price tag. At 3.26, the "Orange County premium" is slightly higher than the measure for all of 2006 but slightly lower than 2003 and 2004. Look at it this way, our mid-priced house costs $489,650 more than the nation as a whole. Since 1981, the "Orange County premium" has averaged 2.3, meaning a typical Orange County home has cost 2.3 times more than what buyers pay nationwide. Not that "revert to the mean" is always right, but it's worth noting that it would take a $201,000 drop in local prices to bring current pricing back in line with the historic premium. This Sunday, my Register column discusses this premium -- and how it got me into trouble five years ago. (Want a hint? CLICK HERE:" http://www.ocregister.com/ocregister/money/abox/article_1114525.php
Posted by Jon Lansner at 11:32 PM

My single question is, why would anyone at the FED think it's in our country's long-term economic interest for it to intercede to "ease" the pain caused by the coming (& much needed) r.e. price reversion?

Posted by: bailey | April 27, 2007 at 12:44 PM

On the topic of consumer led recession, I'll throw in a 98% probability pointless anecdote.

We've paid the AMT for years, so I suppose we're upper middle class. We (knowingly and reluctantly) overpaid (10% over at least) for a home at the peak of the market, but it was, by traditional measures, well within what we could afford.

Here's the kicker. We're not saving money any more. We've reasonably cheap tastes, so we've never had to worry much about saving. It just happened. Now we are neutral to negative.

We're still analyzing, but the bottom line is that coasts have risen faster than revenues across the board for us for about five years. Taxes (AMT, real estate, local, state), replacing things that don't last, communication costs, home costs, groceries, costs of eating out, everything.

I'm starting to ask around. My neighbors tell a similar story.

We're going to be cutting back fairly savagely. I wonder how often this is happening now ...

Posted by: Anonymous coward | April 29, 2007 at 08:52 AM

Excellent info, I liked it.

Posted by: Alex | June 30, 2007 at 05:55 AM

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April 25, 2007


Some Inconvenient Truths

The Financial Times has uncovered some stumbling blocks on the road to carbon neutrality.  Its multi-part report starts with a useful tutorial:

Offsetting is a fundamental principle of the Kyoto protocol – an agreement among more than 160 countries that came into force in 2005. It allows developed nations to meet emissions reduction targets by funding projects such as wind farms or solar panels in poorer countries through the so-called “clean development mechanism”. This awards such projects “carbon credits”. The credits, which can be traded on the international carbon markets, sell for between $5 and $15 (€3.66-€11, £2.50-£7.50) per tonne of carbon dioxide. To aid comparison, other greenhouse gases – such as nitrous oxide and methane – are measured as equivalents of CO2.

Carbon markets have grown rapidly since they were brought into being by the Kyoto treaty and the start of the European Union’s emissions trading scheme in 2005, under which companies were issued with tradeable permits to emit carbon. The price of carbon in the EU scheme more than halved last year after it was revealed that more permits had been issued than were needed in the first phase, from 2005 to 2007.

In the first nine months of 2006, according to the United Nations and World Bank, up to $22bn of carbon was traded. About $18bn of this was through the EU’s emissions trading scheme, and $3bn through the Kyoto mechanism.

The third element, the voluntary market, is where most offsets are bought. Businesses participating in this are not bound to reduce emissions, unlike companies under the EU trading scheme or governments under Kyoto. In 2005, the World Bank estimates, the voluntary market formed under 1 per cent of global dealings, trading fewer than 10m tonnes of carbon a year. But by 2010, the consultancy ICF International forecasts it will grow 40-fold to be worth $4bn.

Most companies going carbon-neutral use intermediaries to buy offsets on their behalf.

According to the FT, however, all has not gone well:

The FT investigation found:

■ Widespread instances of people and organisations buying worthless credits that do not yield any reductions in carbon emissions.

■ Industrial companies profiting from doing very little – or from gaining carbon credits on the basis of efficiency gains from which they have already benefited substantially.

■ Brokers providing services of questionable or no value.

■ A shortage of verification, making it difficult for buyers to assess the true value of carbon credits.

■ Companies and individuals being charged over the odds for the private purchase of European Union carbon permits that have plummeted in value because they do not result in emissions cuts.

In the end, the FT editors conclude that it's time to join the Pigou club:

The Kyoto protocol to fight climate change expires in 2012. The shape of a successor treaty is still in doubt, but one aspect seems certain: carbon trading will play a major role. A Financial Times investigation today reveals that carbon markets leave much room for unverifiable manipulation. Taxes are better, partly because they are less vulnerable to such improprieties.

I'm waiting to hear a good case made to the contrary.

UPDATE:  More on the topic, from Greg Mankiw and from Felix Salmon.

UPDATE AGAIN: Yet more at Reviving Economics: Here, here, and here.

April 25, 2007 in Energy, This, That, and the Other | Permalink

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A carbon tax program is not going to eliminate the problems with compliance and monitoring. You still need to figure out who is polluting and by how much, and to verify any claims of output reduction. This has to occur within a multinational framework where many countries are going to be motivated to cheat and to assist their local industries. The system doesn't regulate itself.

Another big question with taxes is whether there would be tax credits for projects that sequester carbon. From the policy perspective, this is desirable: if someone can come up with a cost-effective technology to remove carbon from the air, we would want to reward them. If everyone else has to pay to put carbon into the air, they should get paid to remove carbon from the air.

But once we do this, I think we would see many of the same problems of abuse and misdirection that have bedeviled the carbon credit program. If someone is planting a forest and wants to claim a tax credit, how do we know that the trees are really going to be allowed to grow for the next 50 years? Particularly in the third world, the institutions necessary for accountability and monitoring just do not exist.

While a Pigouvian carbon tax does make economic sense and is probably simpler to implement than cap and trade, it is far from a simple fix. Advocates should be prepared to face the same kinds of messes and problems that the EU carbon trading system has run into in its first years.

Posted by: Hal | April 26, 2007 at 12:41 PM

I forgot to mention another problem with a carbon tax: setting the level. The paradox is that setting the carbon tax rate at a level corresponding to economic estimates of future harm will probably not produce significant reductions in greenhouse gases.

A commonly bandied about figure is $100 per ton of carbon. This is actually rather high compared to most analyses. (Tol[1] reviewed the literature in 2005 and found that $14/tC was the median among over 100 studies, with higher quality studies producing lower values.) The Stern report did come up with a higher number but that is something of an outlier and has been criticized for unreasonably low discount rates[2].

But even if we use $100/tC, that is only about 20 cents a gallon of gasoline. That's going to be a drop in the bucket compared to existing European gasoline taxes. And even in the U.S. it's largely going to be lost in the noise of our month to month gas price fluctuations. I can't believe that an extra 20 cent gas tax is going to force anyone to conserve significantly or change their habits to reduce CO2 emissions.

It may be easy to sign up for the Pigou tax program, but when it is time to bell the cat and put a number on the table for the cost to put a ton of carbon into the air, I think we're going to see a lot less agreement. It's pretty tough to come up with a number that is both scientifically defensible as a cost, and which will also lead to realistic CO2 reductions.

[1] http://www.uni-hamburg.de/Wiss/FB/15/Sustainability/enpolmargcost.pdf
[2] http://www.econ.yale.edu/~nordhaus/homepage/SternReviewD2.pdf

Posted by: Hal | April 26, 2007 at 12:56 PM

Hal,

the short-run elasticity e.g. of gasoline demand with respect to the gasoline price maybe very low, but the long-run effects are much more pronounced. Although it will not likely reduce the mileage, it will definitely make buyers shift toward more efficient cars. The difference between U.S. and Europe does not need to be mentioned. It's like with the recent hike with gasoline prices - it had a deniable effect for the moment, but I bet that people think much more about fuel consumption when they get their new car.

A similar development is likely to be seen in the energy efficiency of housing, an area where there are even higher reserves, I believe.

Having said that, I have to agree with you that 20 cents per gallon (I am relying here on your claim) is very small. In this respect, the increases in market prices will have a much stronger impact. (I was tempted to write "were much better", but did not, since I am not convinced at all what is "better" in this game).

Posted by: pinus | April 26, 2007 at 01:31 PM

Taxes at the point of production of coal, oil, and natural gas should be moderately simple. Other pollutants, even water vapor, should be considered but unless concentrated would probably not be workable. Subsidies for technologies that lower demand and increase efficiency should be more substantial, measurable, and concentrated. Sequestration is more difficult as all the energy inputs must considered and are often difficult to measure. Many actions may have impacts which are nearly incalcuable.

Posted by: Lord | April 26, 2007 at 03:19 PM

Hal -- Your points are well taken. Conceptually the cap-and-trade system will look like some sort of equivalent tax scheme, as Greg Mankiw points out. You note the issue with tax credits, and that does seem to be part of the problem. By way of analogy, think about a tax policy designed to increase saving. We can either tax consumption or subsidize saving. We can construct these policies so that they are in an abstract sense equivalent, but with the latter it might be harder to eliminate loopholes that merely involve shifting around behavior. (Think tax-preferred accounts vs other forms of saving.) I could be wrong, but I take it from the FT article that this is what is happening to some degree with the carbon-trading system. Perhaps there is a way to construct the trading system that avoids that particular problem, but it seems easy with a tax system -- just don't go down the road of crediting particular types of activity (inputs) and focus on outputs. Not easy to do, but it seems to me that applies to both approaches more or less equally once a trading system involves caps.

Posted by: Dave Altig | April 28, 2007 at 09:53 AM

Another issue with regard to a Pigou tax, which is touched on in some of the articles you link to, is what to do with the embarrassing windfall of tax revenues. Classic Pigovian theory would be to rebate them to the public more or less evenhandedly. In practice everyone seems to feel that they have better ideas, whether Mankiw's reduction of corporate income taxes or alternative proposals to boost renewable fuel research.

Actually we in the U.S. are lucky. Since carbon pollution is a global problem, it needs to be solved on a global level. A global Pigouvian tax of say $100/tC would collect $200 billion/year in the U.S. based on per capita U.S. emission of about 7 tC/year. Since worldwide average emission levels are only about 1.4 tC/yr, 80% of the U.S. tax receipts should be distributed to the 100-odd countries which emit less than the global average. This $160 billion will make a nice supplement to our existing foreign aid budget of $15 billion and will no doubt be welcomed by the third world.

The bottom line is that to really do Pigou right most Western countries will have to divert the great majority of these new tax revenues to the poor countries of the world which are getting harmed by global warming caused by the rich. It is plainly equitable, but given the relatively modest funding levels foreign aid has achieved in the past it is questionable how well this will go over as part of the Pigou package.

Carbon numbers from http://www.nationmaster.com/graph/env_co2_emi_percap-environment-co2-emissions-per-capita (dividing by 3 since that page shows CO2 rather than C emissions).

Posted by: Hal | April 29, 2007 at 02:47 AM

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April 24, 2007


Less Bad Than Meets The Eye?

That seems to be the question after today's big negative surprise on March existing home sales.  A sampling of reactions, from The Wall Street Journal:

This looks awful but it is surely just the reversal of the favorable weather effects which boosted Jan & Feb sales. After two months above the level implied by the pending sales index, March activity has undershot… Ian Shepherdson, High Frequency Economics...

Weak data correcting last month's quirky lurch higher… Lead indicators such as mortgage applications and the NAHB survey suggest resales may now flatten out in the short term at least. --Richard Iley, BNP Paribas

Then there are those on the other hand:

Ugly is the simplest word for this report. The housing market is still in the tank and while every time we get a huge decline in sales we move closer to the bottom, it is hardly obvious when we will actually see that bottom. --Naroff Economic Advisors ...

The broad-based nature of the sales weakness suggests that this is more than just a weather story…  A better gauge of underlying home price trends -- the S&P/Case-Shiller index -- shows a steady deterioration in home values in recent months and is now down 1% from last year. --Morgan Stanley Research

Actually, the latest S&P/Case-Shiller indexes -- futures based on the S&P/Case-Shiller composite index for the ten largest markets more specifically -- suggest that, relative to last month, the bottom on expected prices inched north just a little bit :

   

March

April

   

On that other hand (again), prices are expected to keep falling throughout the year.  No rest for the weary.

April 24, 2007 in Data Releases, Housing | Permalink

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The Case Shiller data is somewhat surprising ( I B not making a pychological report) given the inventory build, given even a Marketplace article on how to preserve your home value (paint, cut the grass, rinse and repeat --this saves gazillions on anti-depressants and, provided you use the reel mower and not the gas or electric ones, will have the girls whistlin at what an environmental wonder you are), given the subprime meltdown and cries for help from record foreclosures....it is hard to imagine that house prices are only down 1%.
Not in the last week. Year over year medians...carefully weeded medians for flippers or renovated.
Or maybe distressed sales? Maybe that's it: anything more than a 1% price decline would be a distressed sale...

Posted by: calmo | April 24, 2007 at 11:12 PM

Does this imply that future players are beginning to believe our Bubble state lenders, i.e. CA, NV, FL (which I guess contribute 2/3 of 2/5 of our mtgs.), are unlikely to tighten mtg. lending criteria within the contract periods? If so, I agree.
Beyond our Bubble states, Freddie has stated it won't implement its tighter lending policy until Sept. And, just last week it announced it would prepare to buy $20 billion of problem loans. Fannie, meanwhile, has lost its voice, it hasn't said anything about restricting its suspect policies.
Back in CA, TV viewers are besieged daily with mtg. lending teaser infomercials (I count 4 daily) plus additional Ads. Aside from a. the mtg. industry's decision to lock out the smallest percentage of unqualified borrowers (those who had no down, no proof of income AND bad credit) and b. National banks being asked to follow a slightly tougher sounding "Guidance".
So, this travesty isn't over, it's just been extended. We won't have a clue where the bottom is until we see what happens AFTER we stop lending to those whose only hope to pay their mtg. is for their home value to rise.
Like AG said last month, we wouldn't have a subprime problem if home prices went up just 10%. But, maybe DOW 20,000 will help.

Posted by: bailey | April 25, 2007 at 01:05 AM

New home sales were not all that was hoped, either. And inventories are still quite high.

Posted by: kharris | April 25, 2007 at 12:29 PM

I think peoples false optimism made that raise in jan. now reality strikes

Posted by: payday loans | September 17, 2009 at 07:06 AM

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Does Globalization Make Monetary Policy Harder?

According to the Financial Times, the answer is "maybe", but the message is a bit tricky.  On the one hand:

... Take the renewed worries about how energy costs might contribute to broader price pressures...

Such cost contagion is, of course, not enough to cause inflation expectations to rise. Rather, it broadly shows markets doing their job in reacting to changes in relative prices. Higher oil prices encourage the use of substitutes. They also shift demand to goods and services less affected by the shock. As long as monetary policy remains steady, the end-result would still be painful but not inflationary.

That is right on target, but:

... According to conventional wisdom, globalisation has been one of the chief reasons why the loose monetary policy of the past decade has not translated into swifter consumer price inflation. Cheap imports from India and China were said to have eroded the pricing power of, say, US companies at home.

That view always raised a few questions, such as how long any such damping effect might last. Intriguingly enough, rising oil prices may already have caused it to wane.

Since the "cheap import" phenomenon is just another variant of "changes in relative prices", the article's first observation is perfectly apt: "As long as monetary policy remains steady, the end-result would still be painful but not inflationary."  But the author of the article apparently has something a little more complicated in mind:

Recent research by two economists, Paul Bergin and Reuven Glick, suggests prices of a wide range of goods did indeed converge globally – until about 1997. Since then, prices have drifted apart again, perhaps owing to rising transport costs.

Here, more specifically, is what Bergin and Glick uncover:

This paper documents significant time-variation in the degree of global price convergence over the last two decades. In particular, there appears to be a general U-shaped pattern with price dispersion first falling and then rising in recent years, a pattern which is remarkably robust across country groupings and commodity groups... However, regression analysis indicates that this time-varying pattern coincides well with oil price fluctuations, which are clearly time-varying and have risen substantially since the late 1990s. As a result, this paper offers new evidence on the role of transportation costs in driving international price dispersion.

The implication seems to be that globalization -- increasingly open trade, more precisely -- has introduced patterns in observed prices that make it more difficult to disentangle relative price changes from trend inflation.  There does not yet appear to be much evidence of such a problem appearing in the behavior of long-term inflation expectations:

   

Spf

   

Nonetheless, it is worth thinking about the FT's suggestion that the types of influences identified by Bergin and Glick "could make monetary policy a lot trickier going forward."      

April 24, 2007 in Federal Reserve and Monetary Policy | Permalink

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Tonight I’m going to party like it’s 1999! According to the data I just downloaded, Q1 1999 was the last time (and the only other time since they’ve been keeping track) that the SPF 10-year median CPI inflation forecast went below 2.45%. (I’m not sure why that doesn’t show up in your chart.) As of Q1 2007 it’s 2.35%. Indeed that’s the first time it’s been out of the narrow range of 2.45% to 2.55%. If I were a technical analyst, I think I’d call that a downside breakout. No wonder the yield curve is inverted! (On the other hand, though, why are TIPS yields so low?)

Posted by: knzn | April 24, 2007 at 09:47 AM

"Indeed that’s the first time it’s been out of the narrow range of 2.45% to 2.55%." Just to clarify: I meant the first time since 1999. Clearly it was above that range most of the time prior to 1999.

Posted by: knzn | April 24, 2007 at 09:50 AM

I think the globalization impact on monetary policy has more to do with capital flows. Take for example Japan. It appears low interest rates in Japan has resulted in capital outflows without influencing consumer spending. Whether you are a monetarist or Keynesian, consumers have to spend more currency in order for prices to rise. If shifts in interest rates result in capital flows and not consumer activity, the ability to influence consumer prices is diminished.

Posted by: TDDG | April 24, 2007 at 10:31 AM

TIPs derived 10 year expectations look different - rising recently rather than falling.

http://clevelandfed.org/research/Inflation/TIPS/index.cfm

Posted by: Mark Thoma | April 24, 2007 at 11:44 AM

As I mentioned in reply to Mark’s comment on my blog, I’m getting skeptical about what the TIPS data suggest. (I’ve always been skeptical about the adjustment, and I am getting more so looking at the latest chart.) There’s obviously a lot going on in the TIPS market that has to do with things other than the expected inflation rate, and the adjustment does not seem to be capturing much of that, if any. It’s not quite a needle in a haystack, but finding a 10 basis point shift in actual inflation expectations within the non-classical pincushion of the TIPS market could be difficult. One issue that I think is relevant for the latest data is that the uncertainty surrounding inflation has probably risen. That would imply a rising risk premium, which might offset a change in the expectation.

Posted by: knzn | April 24, 2007 at 12:33 PM

I see relative stability when I look at TIPS as well. They are not as rock-steady as the SPF data, but that's the difference between a survey and a market price which has some inherent amount of volatility. We do aour best to make some adjustment for that, but as knzn points out its probably not perfect.

Posted by: Dave Altig | April 24, 2007 at 09:53 PM

The intellectual firepower in this thread is impressive (FT's Lex staff, several PhDs, a bond PM, an economist with an affinity for Homer (the poet, not Simpson))!

I think FT is not distinguishing between the contentions:
1. "Globalization makes it harder to conduct monetary policy" and
2. "Globalization reduces the power of central banks to use monetary policy to affect economic outcomes."

Global capital flows and securitization have disintermediated the banks previously most affected by Fed Funds rate changes. Monetary policy has gotten "harder" because the central banks' levers of power don't work so well anymore, not because of a rise in global wealth and global trade.

I'm also glad to see that we're all talking about inflation as a *generalized rise* in the prices of all (or substantially all) goods and services. Too many people think that greater short-term demand for health care services, for instance, is "inflationary," when really it just reflects a change in the mix of the aggregate spending basket. (See 1981's "Inflation: the Cost-Push Myth, brought to my attention by Bloomberg's Caroline Baum a year or so ago.)

http://research.stlouisfed.org/publications/review/81/06/Inflation_Jun_Jul1981.pdf

Posted by: Bond investor | April 25, 2007 at 01:46 PM

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April 15, 2007


Heard This One Before?

The Financial Times reports:

The world’s biggest economies on Saturday strengthened their commitment to reducing global imbalances but stopped short of making these pledges binding.

The “multilateral consultations” undertaken by the International Monetary Fund, included plans by China to make its exchange rate more flexible “in a gradual and controlled manner” against a basket of currencies.

There's not much to suggest that the "gradual and controlled manner" is having any impact quite yet.  Brad Setser puts it about as succinctly as it can be put:

There is just no way to get around the fact that China bought a ton of foreign exchange in the first quarter.

The Treasury is turning up the heat...

U.S. Treasury Secretary Henry Paulson stepped up his push for rule changes that would allow the International Monetary Fund to monitor and disclose cases of countries that manipulate their currencies, calling for action "very soon.''

"Reform of the IMF's foreign-exchange surveillance is the linchpin'' of needed changes in the 63-year-old fund, Paulson said today in a statement to the IMF's semiannual gathering in Washington. "We look forward to action in this important area very soon after these meetings.''

... but the response of the Chinese government sounds pretty familiar:

"We have noted the efforts to strengthen Fund surveillance since the Singapore Meetings, including through possible revision of the 1977 Decision on Surveillance over Exchange Rate Policies," [Hu Xiaolian, deputy governor of the People's Bank of China] said.

"In this regard, we wish to emphasize that, first, revision of the Decision should not proceed too hastily," she said. "In making adequate and careful analysis, the Fund must take the opinions of all concerned parties into account and build broad consensus among all member countries to ensure that it would benefit them all."

Second, in strengthening surveillance, the Fund should be realistic, and not overestimate, the role of exchange rate, Hu said.

"Biased advice would damage the Fund's role in safeguarding global economic and financial stability," she said, while emphasizing that the focus of surveillance should be consistent with the purposes laid out in the Fund's Articles of Agreement.

"Due respect should be paid to the fundamental role of sustaining growth in promoting external stability. External stability can only contribute to overall sustained stability when anchored by domestic stability," she concluded.

Also Saturday, Hu Xiaolian said that China's economic growth model has undergone welcome changes and its economy will continue on path of steady and fast growth.

"The Chinese economy is projected to remain on a fast growth track -- exceeding 8 percent in real terms -- in 2007," she said, adding that the government will give more emphasis to the quality and sustainability of economic growth.

She also said the reform of the China's foreign exchange regulatory framework has steadily deepened. "The RMB exchange rate formation mechanism is being improved and flexibility of the RMB exchange rate has increased significantly," she said.

Sounds like the status quo to me.

April 15, 2007 in Asia, Exchange Rates and the Dollar | Permalink

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"Sounds like the status quo to me."

Yep, but here's an interesting prespective from Latin America, reported by MarketWath's Rex Nutting:

Argentine Economy Minister Felisa Miceli argued that the [IMF]'s problems go far beyond inadequate surveillance of currencies.

"To many in both the developed and developing world, globalization has not brought the promised economic benefits and this is breeding a nasty protectionist sentiment," Miceli said. "Ministers need to be mindful of the political consequences of having the fund advocating for policy changes that breed protectionism and radical political opposition."

Income inequality is growing everywhere. "What is the fund doing about this?" said Miceli. "Well, very little or perhaps even more harm than good."

Miceli said effective currency surveillance would not be easy.

"If the fund has not been more effective in the surveillance of systemically important countries, it is mostly because these countries do not need to listen to the fund's exhortations," either because they, like the United States, can print all the currency they need, or, like China, have amassed huge currency reserves, Miceli continued.

Posted by: Wayne | April 15, 2007 at 11:26 AM

I agree Dave,

pretty much steady as she goes which after all also is what the data (oh sorry , Setser :)) tells us.

Meanwhile, everybody is looking to the ECB and the Euro-dollar. Indeed it is ticking up but for how long, or should I say for how long can the ECB keep on nudging upwards?

Of course then, the ECB and other European politicians are looking to Japan arguing that it is certainly about time for the Yen to reflect the fundamentals of the Japanese economy.

Now, that we certainly also have heard before :).

Posted by: claus vistesen | April 15, 2007 at 02:50 PM

Non-binding is the way everything is done these days. Like when you say to somebody you have no intention of seeing again, "I'll call you."

Shyeah....

Posted by: muckdog | April 15, 2007 at 09:44 PM

China's attitude towards the IMF/G7 is exemplefied by two facts:

1) The PBOC governor and Finance Minister stayed at home;

2) They marked USD/CNY higher today

Posted by: Macro Man | April 16, 2007 at 09:01 AM

As long as China remains such a large buyer of foreign exchange, none of the other great powers will have any leverage to change China's trade behavior.

The US could unilaterally prevent China from buying T-bills, but that would hurt Americans more than the Chinese.

This is only an issue because unions are politically significant.

Posted by: Erasmus | April 17, 2007 at 05:36 AM

a few simple truths:
- The enormous r.e. bubble we've witnessed was NOT caused by low interest rates OR the FED.
- Bubble states, including CA, NV, FLA, have yet to sign on to CSBS' nontraditional mtg. guidance. (It's been five months since CSBS issued the guidance & seven months since the FED directed its national banks on the issue.)
- National Bank owned credit card issuers are STILL aggressively offering 0% interest financing on transfers & purchases for the next YEAR.
- Freddie-Mac & Fannie-Mae are dangerously out of control, as are way too many of our hedge funds.
- Bond market strategists strongly believe BB WILL ease ff rates come fall. (So much for my theory they'd fall into line if BB talked straight to them!)

BB inherited the greatest mess the FED's seen since the 1930s, but BB alone (not Paulson) will be judged on whether we return to responsibile economic decision-making.

It is NOT the FED's job to see we never endure the horror of two successive quarters of negative GDP growth.

Posted by: bailey | April 19, 2007 at 12:32 PM

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April 12, 2007


Capital Spending Concerns On The Chart With A Bullet

Barry Ritholtz said it yesterday...

It is increasingly apparent from the many economic signals we have seen that business spending is fading, and is unlikely to replace consumer spending anytime soon. This is one of the reasons are recession expectations keep ticking higher, beyond 50%.

... and in an article dated tomorrow but posted online today, the Wall Street Journal reports that its own survey of economists reveals a similar concern, if not quite the same degree of pessimism:

Weakness in business capital spending is edging out housing as the dark cloud on the U.S. economic horizon.

A new WSJ.com survey found that 20 of 54 economic forecasters responding to a query cited soft capital spending as the chief risk to their forecast that the U.S. economy will grow slowly but avoid recession this year.

It is pretty clear from whence the worry comes:

The Commerce Department says overall business investment fell an inflation-adjusted 3.1% in the fourth quarter, the first drop since early 2003. And government measures of orders for and shipments of capital goods so far this year have been unexpectedly weak...

The Fed, in minutes of its March meeting released this week, said that "financing conditions and other fundamentals remained favorable for a pickup in capital spending."

But the current softness comes as a surprise to many analysts. Indeed, the Fed minutes noted, "Investment in goods and services other than transportation and high-tech equipment softened more than fundamentals had suggested."

The consensus, however, remains on the side of continued expansion:

Economists responding to the WSJ.com survey were slightly gloomier about the prospects for the U.S. economy than they were a month ago. On average, they now estimate the economy grew at a 2% annual rate in the first quarter, down from the 2.3% estimate they made in March. They predict the economy will grow at a 2.2% pace in the current quarter and pick up momentum in the second half...

On the whole, economists see limited risk of recession over the next 12 months, putting the probability at 26%, near the same level of risk they've forecast since last summer. When asked to identify the one economic indicator they would watch to determine if the economy will slip into recession, 23 of 58 named the Labor Department's monthly employment report...

Although I think Barry was correct in his warnings to not get carried away with the March employment report, the jobs picture is still the best reason to stay calm.

UPDATE:  Not surprisingly, The Big Picture notices this story too. Mr Ritholtz, however, seems to think tight monetary policy is the root cause:

When your growth is dependent upon cheap money and easy credit, guess what happens when credit tightens and money becomes less easy?

I don't know about that take -- "money" doesn't seem to me to be the problem.  I'd worry about something more fundamental being afoot.

April 12, 2007 in Saving, Capital, and Investment | Permalink

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I see little reason to see employment as a leading indicator. Last time, in December 2000, unemployment was something like 4.4% - just 2 month before recession.

Posted by: theroxylandr | April 12, 2007 at 10:36 PM

Well things are different now theroxy, water runs uphill when you aren't looking and more.
The employment picture as per the 4.4% UE stat suggests a tight labor market in the same way that 5.25% FF rate suggests tight money supply.

It used to.

Now there are blockages to suggestion reception: even businesses are not spending those profits on plant expansion --they no longer believe the suggestion that the tight labor market is a capable consumer; they would rather take their chances on M&A and be a survivor; they don't have any respect for that "tight" 5.25% FF rate because they don't need to borrow...not like their employees who may not be able to spend the house indefinitely. His current irrational exuberance illustrated by the core CPI stat is anchored by the housing proxy OER which is climbing...just like that water running uphill.

Posted by: calmo | April 13, 2007 at 03:21 AM

Before the jobs report we were looking at a 1st Q gain in hours worked by production workers of around zero. Now it is 1.5%.
If the hours worked in the productivity report grows at the same pace -- before this cycle that was a safe assumption but in this cycle the jobs data shows stronger hors worked growth-- this implies that with 2% real GDP report productivity growth will be under 1%.

Productivity growth is an outstanding leading indicator
-- compare real gdp growth to productivity growth lagged two quarters --and this would imply even further slowing of the economy over the next two quarters.

Posted by: spencer | April 13, 2007 at 10:40 AM

Just to clarify, the argument is that business spending is the risk to the outlook for below trend but not recessionary growth. Housing was largely responsible for the expectation of below trend growth. The new risk is from business spending. That needn't mean business spending will be a bigger drag than housing. It just means business spending is the less widely expected drag. Identifying business spending as the risk to the earlier view need not be a matter of magnitude. It can be - and probably is - a matter of newness.

Gotta say though, the slowdown in business spending is not a surprise to everybody. Keying on profits to the exclusion of all else, as Fed officials seemed to do a few months back, may prove to be a mistake. Orders, industrial production, spending plans and a number of other series could have given you the willies several month ago.

Posted by: kharris | April 13, 2007 at 02:49 PM

Business spending is going to collapse from housing/lending crisis like it collapsed with the dot.com/equity bust in 2000.

When it starts declining in double digit %'s, manufacturing will contract signifigently and that leaves only the little consumer left.

Will they continue on with the debt binge or will that finally turn out the lights and trigger a MAJAR recession?

I am surprised people can't put A+B+C together.

Posted by: ac | April 13, 2007 at 05:35 PM

Employment is a coincident indicator. It never gives an advance recession signal. It could be safely ignored.

Why this time should be different?

Posted by: theroxylandr | April 22, 2007 at 08:47 AM

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April 11, 2007


The Nattering Naybob Takes On Verizon Vs. Vonage

The Nattering Naybob has been thinking about this story ...

Vonage Holdings Corp. must pay $58 million plus monthly royalties to Verizon Communications Inc. for infringing three patents on Internet-telephone service, a federal jury ruled...

The jury found that three of five disputed patents were infringed and all five are valid.

... and he is not happy.  Naybob's post contains a long and detailed discussion of what the disputed patents are about.  Most of it is beyond me, but I do get the drift:

To allow a patent like this to stand would be analogous to allowing Verizon to patent the common practice of placement and use of salt and pepper shakers on public restaurant and cafeteria tables.

If these patents and their claims are found valid, Vonage would find it difficult to design an alternative way of hooking its network to the [PSTN].

And so would any VoIP provider as the entire VoIP industry has built its back on the ENUM standard in RFC 3761. Therefore, the entire VoIP industry would have to shut down, and the ENUM internet standard as defined would also be dead.

OK, I don't exactly understand that last part. Nor do I feel competent to judge Naybob's claim that the patent system is in this specific case being used to restrain competition rather than protect legitimate intellectual property rights.  But it does bring to mind Adam Jaffe and Josh Lerner's "Innovation and Its Discontents."  Say Jaffe and Lerner:

Over the course of the nineteenth and twentieth centuries, the United States evolved from a colonial backwater to become the pre-eminent economic and technological power of the world. The foundation of this evolution was the systematic exploitation and application of technology to economic problems: initially agriculture, transportation, communication and the manufacture of goods, and then later health care, information technology, and virtually every aspect of modern life.

From the beginning of the republic, the patent system has played a key role in this evolution. It provided economic rewards as an incentive to invention, creating a somewhat protected economic environment in which innovators can nurture and develop their creations into commercially viable products. Based in the Constitution itself, and codified in roughly its modern form in 1836, the patent system was an essential aspect of the legal framework in which inventions from Edison’s light bulb and the Wright brothers’ airplane to the cell phone and Prozac were developed.

All good, right?  Nope.

In the last two decades, however, the role of patents in the U.S. innovation system has changed from fuel for the engine to sand in the gears. Two apparently mundane changes in patent law and policy have subtly but inexorably transformed the patent system from a shield that innovators could use to protect themselves, to a grenade that firms lob indiscriminately at their competitors, thereby increasing the cost and risk of innovation rather than decreasing it...

The origin of these pathologies goes back to 1982, when the process for judicial appeal of patent cases in the federal courts was changed, so that such appeals are now all heard by a single, specialized appeals court, rather than the twelve regional courts of appeal, as had previously been the case. And in the early 1990s, Congress changed the structure of fees and financing of the U.S. Patent and Trademark Office (PTO) itself, trying to turn it into a kind of service agency whose costs of operation are covered by fees paid by its clients (the patent applicants).

It is now apparent that these seemingly mundane procedural changes, taken together, have resulted in the most profound changes in U.S. patent policy and practice since 1836. The new court of appeals has interpreted patent law to make it easer to get patents, easier to enforce patents against others, easier to get large financial awards from such enforcement, and harder for those accused of infringing patents to challenge the patents’ validity. At roughly the same time, the new orientation of the patent office has combined with the court’s legal interpretations to make it much easier to get patents. However complex the origins and motivations of these two Congressional actions, it is clear that no one sat down and decided that what the U.S. economy needed was to transform patents into much more potent legal weapons, while simultaneously making them much easier to get. 

An unforeseen outcome has been an alarming growth in legal wrangling over patents. More worrisome still, the risk of being sued, and demands by patent holders for royalty payments to avoid being sued, are seen increasingly as major costs of bringing new products and processes to market. Thus the patent system -- intended to foster and protect innovation -- is generating waste and uncertainty that hinder and threaten the innovative process.

Jaffe and Lerner summarized their reform proposals in a Wall Street Journal op-ed piece last year:

Our proposed reforms start with the recognition that much of the information needed to decide if a given application should be approved is in the hands of competitors of the applicant, rather than the [U.S.Patent and Trade Office]. A review process with multiple levels efficiently balances the need to bring in outside information with the reality that most patents are unimportant. Multilevel review -- with barriers to invoking review increasing at higher levels, along with the review's thoroughness -- would naturally focus attention on the most potentially important applications...

And to the litigation issue discussed in the Naybob post:

... there are always going to be mistakes, and so it is important that the court system operate efficiently to rectify those mistakes, while protecting holders of valid patents. Today, the legal playing field is significantly tilted in favor of patentees.

The reliance on jury trials is a critical problem. The evidence in a patent case can be highly technical, and the average juror has little competence to evaluate it. Having decisions made by people who can't really understand the evidence increases the uncertainty surrounding the outcome. The combination of this uncertainty with the legal presumption of validity -- the rule that patents must be presumed legitimate unless proven otherwise -- is a big reason why accused infringers often settle rather than fight even when they think they are right.

Both Jaffe and Lerner and Mr. Naybob make the argument that the stakes in getting all this sorted out are high.  On that, I concur.

April 11, 2007 in Economic Growth and Development, This, That, and the Other | Permalink

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David,

A tip o the hat and many thanks... keep fightin the good fight.

Posted by: The Nattering Naybob | April 18, 2007 at 01:03 PM

Exotic Ho Chi Minh City, still referred to as 'Saigon' by many, has preserved its distinctly Asian feel and ancient culture, where monks pray in the numerous pagodas, temples and mosques. The capital Hanoi, is a pleasant and charming city of lakes, shaded boulevards and public parks. The old quarter, built around the Hoan Kiem Lake, is an architectural museum-piece characterised by its narrow streets. Ha Long Bay, with its 3000-plus islands rising from the clear, emerald waters, dotted with beaches and grottoes created by waves, is one of Vietnam's natural marvels.

Posted by: Vietnam tour operator | April 18, 2007 at 09:09 PM

Those that know me know that I am very conservative in my approach to anything. Conservative means . . . we have the right to do business with anyone who wants and deserves our business. I do not like entitlements either public or private. I have used Vonage for my telephone service and long distance. Not only is their service much less expensive than what the wireline carriers offer, Vonage's service is far superior than the service provided by Bell South (the new AT*T) and Verizon. I had cell phone service with Verizon for three years plus. I just cancelled that cell phone contract. I felt that their service fell below the minimum standards acceptable to me. Verizon, in my opinion, does not have it's customer's interest at heart.

Now, here comes the mighty wireline carrier, Verizon, with all it's money and muscle. They are trying to put Vonage out of business. Like Al Gore, they are claiming ownership of the Internet. I don't believe that they invented it nor do I believe that they own it. I do not believe that they should be allowed to put Vonage out of business just because Vonage is out performing them. If Vonage loses then you as a user of communications also lose.

I very seldom get involved in organized things such as this, but I very much remember the OLD AT&T. I do not want that again. However, it is happening again anyway. Companies like Vonage have given us long distance and local service at very high quality and very low prices. My service cost me basically twenty five dollars a month and that includes all local and long distance calls. Their computerized services are far superior to any wireline carriers, like AT&T and/ or Verizon.

This is your fight too. If Verizon 'whips" Vonage, they are whipping you too. Vonage needs your help in fighting the BAD GUYS here!.

I think that you should pass this on.

R McPeak

A very happy Vonage customer.
A very unhappy Verizon customer, to the point that I canceled service with them last week..

Vonage email contacts, if you want them:

jeffrey.citron@vonage.com
ir@vonage.com
support@vonage.com
paula.pangilinan@vonage.com
This is a copy of my letter to the CEO of Verizon, sent this date.

Dear Mr. Lataille,

I believe that competition is good for you and good for me. It helps you become more innovative, more lean and quick in the marketplace. And it saves me money, brings me new products and services that make my life better.

Currently, your company is trying to stifle competition and take selection out of the marketplace. I want you to know I support Vonage as they fight to defend my right to a better and more affordable phone service.

It's clear to me Verizon's actions could limit my freedom to choose a communications provider. I am concerned that if you succeed, the cost of phone service for me and many other U.S. consumers may increase. Instead of competing in the marketplace, Verizon has chosen to bully Vonage in the courtroom. I stand with Vonage as they say enough is enough.

Finally, I say to you, Mr. Lataille, why don't you try competing for my business, instead of trying to put your competitors out of business? It's time you get into the real courtroom where consumers are the judge.

I canceled my cell phone account (706) 726-4500 with Verizon in the last week. I tried very hard to talk with someone in your organization regarding the extremely poor service that I was receiving from Verizon. NO ONE at Verizon cared that I was trying to salvage my account with Verizon. I gave up on your company. Now you want to destroy one of your competitors, Vonage, who is doing an excellent job servicing it's customers. Mr. Lataille, I tried to reach your office and you would not make it possible that I could. Perhaps if enough of your customers quit doing business with Verizon, you might someday get the message. Leave companies like Vonage alone. People like me will remember what you are doing here. NO ONE wants the old AT&T back in spite of what AT & T is telling us. Verizon is just another clone.

Long live Vonage. Shame on "old meannie" Verizon. Vonage must be really waxing your tail!

Sincerly,

R McPeak
34 Barnsley Drive
Evans, Ga 30809

Former customer of Verizon . . . Existing happy customer of Vonage . . . at my choice!


Posted by: r mcpeak | April 26, 2007 at 10:33 PM

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